Trump’s trade war isn’t the main drag on China’s economy

China’s GDP growth slowed to 6.5% in the third quarter of 2018, the weakest since 2009.

While it might seem like President Donald Trump is winning his trade war against China, a closer look at the data suggests other factors are to blame for the weak GDP growth. Tightening liquidity is dragging down China’s growth as the government prioritizes deleveraging the economy, according to economists.

The tit-for-tat tariffs between China and the U.S. may have even helped lift China’s GDP growth number for the time being. China’s trade surplus in goods with the U.S. reached a record high of $34.1 billion in September. As the Chinese yuan lost value, U.S. importers rushed to bring Chinese goods onshore before the tariffs escalate to 25% at the beginning of next year.

On the other hand, Chinese purchases from the U.S. faltered after China imposed retaliatory tariffs on U.S. soybean. In August, China’s imports from the U.S. rose 2.3% to $13.3 billion, much slower than the overall imports growth of 20.4%. Because of higher export and lower import numbers, China is running a bigger trade surplus with the U.S., which actually helps boost China’s GDP. Exports to the U.S. account for less than 4% of China’s GDP.

“The slowdown is not principally due to trade frictions,” economists at PNC Financial Services Group wrote in a note. “Trade frictions between China and the U.S. increase downside risk to China’s growth outlook, but their near-term effects will be smaller than headlines suggest.”

The real reason is domestic policy

Economists see China’s economy as slowing mainly due to the government’s push to limit credit growth and contain financial sector risk, which is preventing capital outflow and limiting the growth of corporate debt.

The deleveraging campaign — intent on curbing financial sector risks and cracking down on unregulated lending — may weaken domestic demand. Domestic consumption has been China’s largest growth engine, as it shifts into a consumption-driven growth model. Consumption contributed 78.5% of China’s economic expansion in the first half of 2018. But tightened credit and fiscal policy are taking a bite out of China’s economic momentum.

While China isn’t feeling the effects of the trade war yet, it is causing headaches in the world’s second-largest economy. Chinese policymakers have been scrambling to deleverage the economy while trying to prevent it from losing too much steam. China is aiming for annual economic growth of around 6.5% this year, compared to 6.9% in 2017. It also warns “further downside risk” on trade in the fourth quarter as tariffs finalize.

However, it might be appropriate for Chinese policymakers to lower their expectations after years of unrelenting growth.

“China’s economy overall is maturing,” Robert Dekle, an economist at the University of Southern California, told Yahoo Finance. “It’s been growing rapidly for many decades, slowing down is inevitable.”

Krystal Hu covers economy and technology for Yahoo Finance. Follow her on Twitter.